Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 11: Q11-26Q (page 583)

The following statement appeared in a financial magazine: “RRA—or Rah-Rah, as it’s sometimes dubbed— has kicked up quite a storm. Oil companies, for example, are convinced that the approach is misleading. Major accounting firms agree.” What is RRA? Why might oil companies believe that this approach is misleading?

Short Answer

Expert verified

Answer

Oil companies are concerned because the valuation issue is extremely tenuous.

Step by step solution

01

Step-by-Step SolutionStep 1: Meaning of RRA

The SEC recommended Reserve Recognition Accounting (RRA) as a mechanism (a fair value approach) of accounting for oil and gas resources. According to proponents of this concept, oil and gas should be priced at the time of discovery. The reserve value that remains on earth is calculated, and this amount is recorded on the balance sheet as "oil deposits" after being correctly discounted.

02

Explaining the reasons for the approach that is misleading.

Oil firms are worried because the value situation is precarious. To appropriately evaluate reserves, for example, the following must be estimated:

  1. reserve value,
  2. future production costs,
  3. estimated disposal times,
  4. discount rate, and
  5. selling price.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter


(Impairment) Assume the same information as E11-16, except that Suarez intends to dispose of the equipment in the coming year. It is expected that the cost of disposal will be \(20,000.

Cost

\)9,000,000

Accumulated depreciation to date

1,000,000

Expected future net cash flows

7,000,000

Fair value

4,800,000

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
  2. Prepare the journal entry (if any) to record depreciation expense for 2018.
  3. The asset was not sold by December 31, 2018. The fair value of the equipment on that date is \(5,300,000. Prepare the journal entry (if any) necessary to record this increase in fair value. It is expected that the cost of disposal is still \)20,000.

Dickinson Inc. owns the following assets.

Asset

Cost

Salvage

Estimated useful life

A

\(70,000

\)7,000

10 years

B

50,000

5,000

5 years

C

82,000

4,000

12 years

Compute the composite depreciation rate and the composite life of Dickinson’s assets.

Under what conditions is it appropriate for a business to use the composite method of depreciation for its plant assets? What are the advantages and disadvantages of this method?

At the end of the current year, Joshua Co. has a defined benefit obligation of \(335,000 and pension plan assets with a fair value of \)345,000. The amount of the vested benefits for the plan is \(225,000. Joshua has a liability gain of \)8,300 (beginning accumulated OCI is zero). What amount and account(s) related to its pension plan will be reported on the company’s statement of financial position?

List (a) the similarities and (b) the differences in the accounting treatments of depreciation and cost depletion.
See all solutions

Recommended explanations on Business Studies Textbooks

Corporate Finance

Read Explanation

Financial Performance

Read Explanation

Nature of Business

Read Explanation

Organizational Behavior

Read Explanation

Business Development

Read Explanation

Operational Management

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free